China Gas Deal Thwarts Sinopec’s Dealmaking Prowess

Sinopec, or China Petroleum & Chemical Corp., has been on a shopping spree for energy assets globally from North America to Africa, led by its acquisition-minded chairman Fu Chengyu. But it’s an obscure deal at home that’s been troublesome for the state-backed deal machine.

As the WSJ reports, Sinopec is in the midst of a US$2.15 billion takeover of Hong Kong-listed natural-gas company China Gas Holdings Ltd. Sinopec made a move on China Gas, together with ENN Energy Holdings Ltd., when China Gas’s share price slumped nearly 50% last year as the company’s co-founder Liu Minghui was sent to prison on charges of embezzlement. But since making its offer in December, the deal has stalled.

Shareholders have balked at what they say is an undervalued offer at HK$3.50 per share, while London-listed Fortune Oil and South Korea’s SK Group have steadily increased their holdings to block the takeover.

Sinopec and ENN argue the deal is sound because the share price reflects corporate governance concerns on the company – which means the underlying assets are undervalued – making $3.50 a good premium to the 2011 share price.

But according to data from FactSet, of 17 analysts surveyed, only 12% have a ‘sell’ rating on the stock, with an average target price of $3.39. The average share price of those who have a ‘neutral’ and ‘buy’ rating on the stock is $3.56, meaning that they believe Sinopec and ENN’s offer is undervaluing the company. On Tuesday, China Gas shares were trading at $3.75.

Some analysts think the deal is almost as good as dead.

UBS says that based on the price that China Gas placed shares at in late 2010, HK$4.31, ENN would have to offer at least that much, plus a premium, to convince shareholders, which it is unlikely to do. ENN’s share price has already been under pressure due to worries over how the company will fund the acquisition.

Piper Jaffray notes that as shareholders such as Fortune Oil and SK keep adding to its holdings in China Gas, the free float of the company has fallen to around 46%, making it very difficult for ENN and Sinopec to own a minimum of 50% by buying shares from public shareholders alone, even factoring in Sinopec’s existing 4.6% stake in China Gas.

Also buoying China Gas’s share price is expectations that another suitor could jump in. Credit Suisse says even if the Sinopec and ENN bid falls through, China Gas would remain an attractive M&A target because of its assets in over 150 cities in China which remain in a developing stage, providing big growth opportunities. UBS thinks Sinopec or PetroChina Co. could emerge as solo bidders as both would like to add to their downstream portfolios, particularly in city piped gas.

Add a Comment

Thanks for reading Deal Journal. We would like to direct you to MoneyBeat, the Wall Street Journal’s brand new global blog. MoneyBeat unites MarketBeat, The Source, Overheard and all the Deal Journal blogs, bringing together all the market, M&A, IPO and hedge-fund news from those blogs into a 24-hour hub for finance news. Check it out and let us know what you think at moneyblog@wsj.com.

About Deal Journal

Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s David Benoit is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to deals@wsj.com.